[Daily & Daily]: Setting aside under section 90K of the Family Law Act: the test for ‘hardship’

The test for ‘hardship’ for the purposes of setting aside financial agreements under section 90K(1)(d) is a constant and continuing threat for those entering into financial agreements during the course of and prior to the commencement of a relationship/marriage.

Section 90K(1)(d) of the Family Law Act 1975 says:

Circumstances in which court may set aside a financial agreement or termination agreement

1. A court may make an order setting aside a financial agreement or a termination agreement if, and only if, the court is satisfied that:

(d) since the making of the agreement, a material change in circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage) and, as a result of the change, the child or, if the applicant has caring responsibility for the child (as defined in subsection (2)), a party to the agreement will suffer hardship if the court does not set the agreement aside.

Accordingly, s 90K(1)(d) of the Act looks at the court’s power to set aside a financial agreement where there has been a material charge occurring by reason of the care, welfare and development of a child, and by reason of that change to the child or the parent, they will suffer hardship if the financial agreement is not set aside.

Section 90K(1)(d) requires not only enquiry as to the parties’ circumstances at the time of entering into the financial agreement with those at the time the material charge has been asserted, but also an assessment as to the degree of hardship that might be suffered by a child or the parent party should the agreement not be set aside.

In Daily & Daily [2020] FamCAFC 304, the full court was concerned with the operation of s 90K(1)(d) and how to apply the ‘hardship’ test.

The test for hardship is well settled:  it requires a comparison of the position of the child, or the person with caring responsibility, if the agreement remains in place and their position if the agreement is set aside (Frederick & Frederick [2019] FamCAFC 87 at [24]; Fewster & Drake [2016] FamCAFC 214 at 67).  So there are two limbs to the applying the test correctly. In Fewster, the court said at 67:

The concluding words of s 90K(1)(d) are “if the court does not set the agreement aside”. Logically and inevitably those words require the court to undertake some comparison between the position of the child, or the person with caring responsibility, if the agreement remains in place and the position of that child or person if the agreement is set aside. It is only by doing so that the court can place itself in a position to determine whether there will be hardship if the agreement is not set aside. The primary judge did not undertake such a comparison.

Daily & Daily

In Daily, the husband appealed the trial judge’s decision to set aside the financial agreement under s 90K(1)(d).

The facts in Daily were as follows:

1. The husband was born in 1971 and is 49 years of age. The wife was born in 1975 and is 45 years of age;
2. The parties started living together in August 1997, before an initial separation in 1999. There was a factual dispute between the parties in relation to whether they recommenced their relationship in October 1999 or November 2001 – but as it was this was not a matter of significance in the dispute. The parties became engaged on 27 October 2003 and married in September 2005. The parties separated on 15 September 2018 and obtained a divorce order in early 2020;
3. There were two children to the relationship, aged 14 and 11 at the time of trial, and the children had been spending equal time with each parent following consent orders made on 17 May 2019;
4. On 21 July 2005, the parties entered into a financial agreement;
5. With respect to the facts regarding the execution of the financial agreement:

1. 1. The husband first sought out legal advice with respect to financial matters during the then de facto relationship with the wife on 26 March 2002, and an email from his lawyer to the husband containing preliminary advice was forwarded on 28 March 2002;
   2. In September 2002, the husband provided his lawyer with further instructions and a draft financial agreement was sent to the husband on 6 November 2002. On 11 November 2002, following the husband’s lawyer making amendments requested by the husband, the husband signed the document, although he did not retain a copy of this document.  This draft was never finalised or executed by both parties;
   3. On 27 June 2005, the wife sought advice from her lawyer and contacted the husband’s lawyers. The wife told the husband’s lawyer that she had been advised that the agreement was not appropriate and would need to be redrafted. The terms appearing in the 2002 document do not appear in the redrafted 2005 agreement;
   4. On 21 July 2005, the wife and her lawyer signed the financial agreement. The terms of the agreement were, relevantly:

In the event of separation, the parties shall divide their assets and financial resources in full and final settlement of all claims between the parties for settlement of property and spousal maintenance either in the past, present or in the future and under Part VIIIA of the Family Law Act 1975 as amended as follows:-

(a)     As and from the date of separation, the husband shall retain for his sole use and benefit absolutely free from any further claim or demand of the wife:

(i)            His assets and liabilities as set out in Schedule A;

(ii)           His work entitlements, long service leave, annual leave and other work related benefits including any superannuation or pension entitlements accumulated after the date of the marriage;

(iii)          His clothing, jewellery and personal effects, and

(iv)          Any gifts or inheritances received by him from any source.

(b)     As and from the date of separation, the wife shall retain for her sole use and benefit absolutely free from any further claim or demand of the husband:

(i)            Her assets and liabilities as set out in Schedule B;

(ii)           Her work entitlements, long service leave, annual leave and other work related benefits including any superannuation or pension entitlements accumulated after the date of the marriage;

(iii)          Her clothing, jewellery, furniture acquired prior to the marriage and personal effects;

(iv)          Any gifts or inheritances received by her from any source.

(c)     The net matrimonial assets will be equally between the parties.

e. Schedule A of the financial agreement recorded the husband as having specified net assets of $404,282 in total value. Schedule B recorded the wife as having specified net assets of $32,287 in total value and Schedule C recorded the parties as having specified joint net assets of $142,761 at the time of signing.

At Trial

At trial, unsurprisingly the parties’ position were as follows:

1. The husband sought to enforce the 21 July 2005 financial agreement; and
2. The wife sought a declaration that the 21 July 2005 financial agreement was not binding under s 90G(1); and
3. In the alternative to a declaration under s 90G(1), the wife sought an order that the agreement be set aside under s 90K(1)(b), (d) and (e) of the Act. It is this ground that is the focus of this paper.

At paragraph 26 of the appeal judgement, the court notes the primary matters the wife relied upon at trial in support of her argument under this ground:

At 258:             The wife relies upon the following matters:-

(1)        That at the time that the agreement was made she was employed as a fulltime serving public servant.

(2)        That following marriage two children were born namely [X], now aged 13 years and [Y] now aged 10 years.

(3)        That the parties agreed the wife would cease her fulltime employment and take on the primary role of caregiver for the children.

(4)        That the husband continued in his fulltime employment which resulted in a substantial increase in superannuation entitlements from $67,669 to $970,578 and savings of $74,230 to $693,508 at or about the time of separation.

(5)        That as a result of the wife’s role as primary carer to the children she suffered a significant reduction in her earnings and has returned to part-time employment only now comprising 0.8 of fulltime equivalent.

(6)        That her capacity to contribute to superannuation and accumulated savings was diminished and in any event is significantly less than the current financial circumstances of the husband.

(7)        As a result of the marriage, the wife’s capacity to earn an income and support herself and the children has been substantially diminished.

The primary judge also found that the birth of the children constituted a material change in circumstances.  At para 268 of the trial judgment, the trial judge said “Whether contemplated or not, the advent of children should be considered as a material change in circumstances since the making of the financial agreement.”  Further, in relation to whether as a result of the material change (the advent of children), the wife would suffer hardship, the trial judge said:

1. At 306, “As a result of the material change in circumstances the wife compromised her employment both in terms of the extent of her employment and potentially her capacity for advancement in order to fulfil the role of the children’s primary caregiver.”
2. At 312, “The current position that the wife namely finds herself in, namely: 

• Incurring reasonable expenses that significantly exceed her income; and
• No prospect of securing accommodation other than rental accommodation,

represents significant hardship that results not just from the care, welfare and development provided by the wife for the children but also her current circumstances of being able to provide appropriately for herself and the children.’

Was there an error with the trial judge’s determination of ‘hardship’?

Interesting, the husband’s appeal was framed in a way that was different to how the appeal court determined the error by the trial judge.  The appeal judgment does not set out the bases on which the husband’s appeal was framed.

The trial court identified the error of law, in regard to the misapplication of the hardship test as follows:

1. The need for the identified comparison to be made as the test to be applied – that is a comparison of the position of the child, or the person with caring responsibility, if the agreement remains in place and their position if the agreement is set aside (see Fewster & Drake [2016] FamCAFC 214 at 67; and Frederick & Frederick [2019] FamCAFC 87; (2019) FLC 93-900 at [24]. The trial judge did this part correctly;
2. However, after correctly citing the test in the trial judgment, the primary judge failed to reach the requisite conclusions or findings as to the position if the agreement is upheld, nor any requisite conclusions or findings as to the position if the wife’s s 79 entitlement were determined in the usual way;
3. In relation to the enquiry as to the wife’s position if the agreement was upheld, the trial judge referred to the husband’s calculation of her entitlement under the agreement. The calculation was a matter in dispute – but, erroneously, the trial judge did not determine this issue;
4. In relation to the enquiry as to whether her entitlement was determined under s 79, the trial judge said “I have not embarked upon an exercise of seeking to determine what would be an outcome in respect of settlement of property by the application of s 79 considerations and s 75(2)factors; and
5. Accordingly, the primary judge did not apply the hardship test correctly due to the failure to make findings and assessments under s 79 and compare that with her entitlement under the financial agreement.

Conclusion

Accordingly, the husband’s appeal was successful, and with some hesitation, the matter was remitted for re-hearing.

Daily helpfully reiterates the concept of hardship for the purposes of s 90K(1)(d), and the analysis required between the terms of the agreement and what it provides for, and the entitlement under s 79 should the court decide to set aside the agreement.